Consumer debt shifting around

BOSTON — Patrick Palzkill got a call last week from a client in Martha's Vineyard, Mass., who wanted to buy a new home. "They are up to their eyeballs in debt," Palzkill says, "but they still want more."

Palzkill is a real estate broker and mortgage originator in Boston, and like other people in the real estate and mortgage business across the country, he is seeing shifts in the lending landscape — not just in real estate, but in other consumer debt as well.

"As far as consumer debt, there is still a big segment of the population that do not have the credit scores (to borrow). They've paid their debts down, but a lot still haven't changed their habits," he says. "They'll still take that cruise and charge up the credit card."

New statistics from the Federal Reserve show that, in the second quarter of 2013, Americans had $11.15 trillion in consumer debt. This is a decline of $78 billion from the previous quarter and way below the peak of $12.68 trillion back in the third quarter of 2008.

When you look at debt in the United States, mortgages surpass everything else several times over. Mortgages account for $7.84 trillion of the second quarter debt. That number is $91 billion lower than the first quarter and $306 billion lower than it was during the second quarter of 2012.

And it is mortgages that account for the drop in overall consumer debt. Take mortgages out of the picture, and overall consumer debt rose by $13 billion.

Paying mortgages

But taking mortgages out of the equation is like dismissing the elephant from the room. Much of the drop in mortgage debt comes from the foreclosure process and the eventual writing off of the amounts due. But Palzkill says it also has to do with people paying down their debts.

"A lot of people are paying off their mortgage debt," Palzkill says. "Why shouldn't they when they were used to paying 7 percent interest and now are paying 3 percent? If they are fully employed, they should be paying it down."

Other areas of debt are picking up. Auto loans, for example, jumped $20 billion from last quarter. And both credit card debt and student loan debt increased by $8 billion each since last quarter.

"From a real estate agent standpoint, this has been my best year in 26 years," Palzkill says. "There are a lot of buyers. There are a lot of sellers. The rates are the lowest they have ever been."

Alex Moore, a broker and vice president at Blackstone Realty Group in El Dorado Hills, Calif. (near Sacramento), sees a different landscape.

"Where I am in (northern) California," she says, "the market is really soft, home prices are still going down. … Sellers are having to bite the bullet and lower the price quite a bit if they want to sell their homes."

Part of the challenges in buying and selling homes — even in areas like Boston where Palzkill had his great year — is the process to get a mortgage. Lenders are more strict in requiring documentation for everything in a loan application. There has to be multiple documented proofs of income, for example. Few chances are being taken.

The exception, she says, is when she looks at some California home developers that are not as careful to make sure buyers are as qualified. "There are crazy scenarios with $3,000 down to buy a $480,000 home in a new home development," she says.

Traditional lenders, however, are being strict on everything with every "i" dotted and every "t" crossed, she says. If you don't have the income documents and other records, people will not qualify for the loan they need.

"They may be making it too challenging in some ways," she says.

If you drive about an hour and a half toward San Franciso Bay, Joe Parsons, is a bit more optimistic.

Parsons is the managing partner of PFS Funding, a small mortgage banker in Dublin, Calif., and says the requirements to get a loan haven't changed so much as the documentation required. He agrees that it is "more arduous," but still doable with a little patience.

But in his area, real estate is doing better for sellers.

"Almost every property has buyers competing with 10 to 15 other buyers to get the same property," he says. "What is discouraging for buyers is they might need to make offers on five to seven properties before they will get a home."

For those in the mortgage and real estate business, challenges may be different depending on their location — but like much of the economy, it relies on debt.